The Cross-Section of Volatility and Expected Returns

57 Pages Posted: 27 Oct 2004 Last revised: 28 Aug 2022

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Robert J. Hodrick

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Yuhang Xing

Rice University

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

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Date Written: October 2004

Abstract

We examine the pricing of aggregate volatility risk in the cross-section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. In addition, we find that stocks with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility.

Suggested Citation

Ang, Andrew and Hodrick, Robert J. and Xing, Yuhang and Zhang, Xiaoyan, The Cross-Section of Volatility and Expected Returns (October 2004). NBER Working Paper No. w10852, Available at SSRN: https://ssrn.com/abstract=611363

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

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New York City, NY 10055
United States

Robert J. Hodrick

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
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National Bureau of Economic Research (NBER)

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Yuhang Xing

Rice University ( email )

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Houston, TX 7705-1892
United States

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

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Haidian District
Beijing 100083
China